Archive for January, 2010

How I Would Choose a Financial Advisor

Thursday, January 28th, 2010

Finding a good financial advisor is hard because you need someone that is both trustworthy and doesn’t have biases that will cost you a fortune.   You certainly don’t want a crook that will steal your money, but you also don’t want a salesman claiming to be an advisor that will mislead you.  Finally, you don’t want someone that believes they are the next Peter Lynch because chances are they aren’t!

Can You Afford a Financial Advisor?

For financial planning there are some cases where you just have to do it yourself.   If you are a new investor starting with $0 and investing $1000 each year you need to be self sufficient.  Any Planner that takes a % of assets under management will not talk to you- there just isn’t enough to cover their cost of doing business.  You could consult with a fee only advisor, but that could easily cost you a year of investing and a better plan doesn’t beat investing earlier.  At $1000/year even buying a $10 investing book will cost you 1% of your investment!  Your best option is to make your own investment plan initially then seek professional help later.  Your plan could be very simple like a low fee target retirement fund in an IRA.  After you have $200,000 or more a professional becomes a lot more cost effective.  At that point the optimization of the portfolio could potentially cover the cost of the advisor.How to StartAsk people you know for recommendations- who they trust to manage their money.  If you can’t get a personal recommendation I would try searching the NAPFA website.  I would plan to interview a few people.  Here is a list of questions to ask from the SEC,  I think how the advisor is paid is the most important question they list.  I would steer clear of advisors that earn commissions from what investments you purchase.  There is just too large a conflict of interest for such an advisor to give you the best advice.   I would prefer an hourly fee over a % of assets under management as advising how to invest $1,000,000 should not take significantly more time and effort than advising how to invest $500,000.

My Questions

In addition to those from the SEC I would also add the following questions:

  1. How did you advise clients similar to me during 2007 and 2008?  Why?  Did they make good decisions- for good reasons?  I think the best answer would be “Stick to our plan but save more/withdraw less.”  Their plan was solid but they are adjusting to the possibility of a harsher reality.  Other good changes include- rebalancing, increasing % bonds as you age, or switching to a lower cost equivalent fund.  If their reaction to 2008 was to scrap the old plan and try some totally new plan seek someone else.
  2. How do you pick the investments you recommend? I would be wary of someone that looks at past performance, remember all the warnings that it isn’t a predictor for future performance? I would also be wary if they claim some special knowledge- it is really hard to beat the market, what is the chance you found the next Peter Lynch? If they could really beat the market consistently then they are wasting their time planning for you as they should be running their own fund and making billions. I would like to hear minimal fees or covering different asset classes, which would naturally lead into choosing index funds.
  3. Describe a time when you convinced a client not to make a stupid mistake? A good advisor should be able to prevent you from making mistakes. If they haven’t done that with other clients a lot they are unlikely to be good advisors.

Retaining Control

Finally, I would want an advisor that would allow me to keep control over my investment accounts.  There are two good reasons to keep control:

  1. That insures you are informed of any changes since you have to make them.
  2. It prevents the possibility of fraud.  Bernie Madoff could never have run his ponzi scheme without controlling the investment accounts and forging the reports and transactions.

There are some disadvantages- you don’t get to delegate the transactions and you may miss out on lower cost funds only available to very large investors.  I bet Bernie’s clients are regretting giving him control.

Want a free $40?

Monday, January 11th, 2010

Have you ever wanted to be the bank and make a lot of interest lending people money?  If so peer to peer lending may be for you.  Peer to peer lending is when you lend money to others through a site like lending club or   They have many people fund each loan to minimize the risk of default,  I’ve been experimenting with the lending club and I’ve gotten over 10% on a pretty conservative loan.  I like their web intereface and it seems a viable way to invest.A great way to try it out is using a promotional offer so you don’t risk your own money.  Right now lending club has a promotional offer- you can send invitations to friends and they get $40 to start investing.  Leave a comment and I’ll send you an invite.  Note as far as I can tell I won’t get a referral bonus myself.

Financial Goals for 2010

Wednesday, January 6th, 2010

I thought it may be helpful to share my financial goals for this year:

  • In order to have financial freedom in retirement:
    • Contribute at least 15% of my income to the company 401K plan via payroll deduction from each check.
    • Contribute $2,500 every three months to Roth IRAs for my wife and myself totaling $10,000 for the year.
  • To open the possibility of early retirement
    • Invest at least $1200 this year in a taxable account by contributing $100/month.
  • To have money available for my future goals:
    • Invest 15% of my income in my company’s employee stock purchase plan via payroll deduction from each check.
  • To aid our children with college expenses
    • Save least $160 per month into 529 plans via automatic deposits.
  • To pay my son’s tuition
    • Save at least $160 per month.

Strategies for Achieving your Goals This Year

Friday, January 1st, 2010

In my last post I suggested making goals instead of making resolutions this year.  Below are some strategies to insure you achieve your goals.  You should not need to use all of these strategies, but I listed several so you can pick the ones you think will help you keep you on track:

  • Hand write a list of your goals and sign it- Your writing is a powerful influence because people desire to be seen as consistent.  Use that influence to your own advantage!
  • Get your friends to set goals for the year as well – and talk about them.   Think about the social pressure- everyone is doing it, you better do it too!
  • Automate whatever you can for example 401K contributions or automatic transfers to savings- set it up then cruise to success with no worries of forgetting.  Leverage laziness!
  • Post a copy of your goals in a place you will see daily- Don’t let your goals out of sight so that they can’t fade out of mind, make that written statement into a daily visual reminder.
  • Re-read your goals at least weekly.  Keep the specifics in mind by rereading your goals!
  • Keep a progress chart with the % completion for each goal, update it at least monthly.  Keep it clear and easy to update.  Filling in a progress bar with a marker is sufficient-  it’s a second to update and it’s difficult to hide from a progress bar that is only 10% full.
  • Mail copies of your goals to friends and family or announce your goals in public- such as on a blog.  Use peer pressure to your advantage, think of the shame if you don’t meet a goal without a good reason.
  • Mail copies of your progress charts to friends and family or post them on your blog.   Do you want to have to explain to everyone why you aren’t meeting your goals?
  • Schedule days to review your goals and progress at least every three months- force yourself to look at your progress and see if you want to revise your goals upward.

Have a happy New Year and accomplish your goals in the coming year!